Tax-exempt Entities, Including Pension Plans & IRAs
The Tax Increase Prevention and Reconciliation Act of 2005 added new sanctions and disclosure rules for tax-exempt entities and their managers who participate in “prohibited tax shelter transactions.”
The new rules potentially affect charities, churches, state and local governments, Indian tribal governments, benefit plans and individual retirement accounts (IRA) and managers of these entities. For this purpose, an entity manager is defined as the person with authority or responsibility similar to that exercised by an officer, director or trustee and, with respect to any act, the person having authority or responsibility with respect to such act. For benefit plans and IRAs, the term means the person who approves or otherwise causes the entity to be a party to the prohibited tax shelter transaction; however, an individual beneficiary or owner of the plan may be liable as an entity manager if he/she has broad investment authority.
A prohibited tax shelter transaction is any listed transaction or any prohibited reportable transaction. Prohibited reportable transactions include confidential transactions and transactions with contractual protection.
The new rules impose excise taxes on a Non-Plan Entity (basically, an exempt organization other than a benefit plan or IRA) that is a party to a prohibited tax shelter transaction. The amount of the excise tax can be as much as the greater of (1) 100% of the entity's net income with respect to the transaction or (2) 75% of the proceeds received attributable to such transaction.
The new rules also impose a $20,000 excise tax on an entity manager who approves the exempt organization as a party, or otherwise causes the entity to be a party, to a prohibited tax shelter transaction and knows or has reason to know that the transaction is a prohibited tax shelter transaction.
Any tax-exempt entity, including a benefit plan or IRA, that is a party to a prohibited tax shelter transaction is required to disclose to the IRS that it is such a party and the identity of any other party or parties to the transaction. Failure to comply can result in a penalty of $100 per day of noncompliance up to $50,000 per failed disclosure. For a Non-Plan Entity that fails to disclose such a transaction, the penalty is assessed against the entity. For a Plan Entity (basically a benefit plan or IRA) that fails to disclose, the penalty is assessed against the entity manager.
Taxable parties to a prohibited tax shelter transaction are required to notify tax-exempt parties that the transaction is a prohibited tax shelter transaction. Failure to do so subjects the taxable party to the same penalties for failure to disclose a reportable transaction to the IRS.
For More Information
Contact your BKD advisor or:Lisa G. Workman
Director of Tax Services
417.831.7283
